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Tuesday, 02/14/2012 8:54:48 PM

Tuesday, February 14, 2012 8:54:48 PM

Post# of 221270


DTCC, through its subsidiaries, provides clearing, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with their distribution networks.

DTCC's depository provides custody and asset servicing for 3.6 million securities issues from the United States and 121 other countries and territories, valued at almost $34 trillion. In 2009, DTCC settled more than $1.48 quadrillion in securities transactions.
DTCC operates through 10 subsidiaries - each of which serves a specific segment and risk profile within the securities industry:

· National Securities Clearing Corporation (NSCC)
· The Depository Trust Company (DTC)
· Fixed Income Clearing Corporation (FICC)
o The Warehouse Trust Company LLC
o DTCC Derivatives Repository Ltd.
· DTCC Solutions LLC
· EuroCCP Ltd.
· Avox Ltd.

What is DTCC Eligibility Anyway?

Once a corporation has been vetted and approved for trading either by FINRA or by the SEC, the corporation must also submit an application to DTC for its initial eligibility to trade. If eligibility is granted, DTC will agree to hold an inventory of the corporation’s free-trading street name shares on deposit. These are the shares that will become the “float”, those shares that are free-trading AND held at DTC. There is currently no other depository that carries an inventory for clearing and settlement of publicly traded shares.

The market maker (the dealer at a brokerage firm who agrees to carry the first amount of shares in inventory on behalf of their firm) must make the initial submission for eligibility. The market maker must either be a participant of DTCC (assigned a DTC Participant Number) or use a clearing firm that is a full participant of DTC. The participant number allows the market maker/clearing firm to enter transactions for their firm into DTC’s software. For approval by DTCC, the company will have to sign the Operational Agreement with DTC. However, DTCC retains the right to deny a company the ability to use their depository without providing a reason for this denial or an appeal procedure to redress grievances or wrongs. The company can still present an appeal but the appeal will not follow a specific procedure or necessitate a response from DTCC. For this reason, before a company applies for initial eligibility, they must have a clean presentation that includes, not only the effective registration, but also can include full disclosure of the provenance of all shares that will be initially deposited as free-trading shares. Provenance means the history of the ownership of the shares presented –the age of the shares, who received them from whom, how much in money or services was exchanged for the shares, etc.

Companies that are listed on the NYSE, the AMEX (ARCA) or NASDAQ markets are already considered properly vetted by DTCC and the SEC’s willingness to make the registration effective is considered a satisfactory and clean presentation. However, those companies who trade on a non-listed market can be more problematic. (FYI, if a company is non-reporting they may not be granted initial DTC eligibility or DTC may pull already-granted eligibility at any time. These companies will rarely be allowed FAST eligibility.)

A clean presentation for a reporting OTCBB or PinkSheet company to become FAST for the first time can be very slow. Issues that will quicken the process are, a) not only being reporting but not missing or being late with any reports; b) having very few name changes or reverse splits in the last 5 years; c) having no people associated with the company that have ever been under investigation; d) having no record of being involved in a spam campaign, pump and dump scheme, or other fraudulent activities through the years that would raise AML / Anti Money Laundering or OFAC / Office of Foreign Assets Control issues; and, e) having no record of unregistered resales at brokerages - especially among the affiliates of the company.

This has been the best laymen’s terms I have found describing what DTCC eligibility means, the author and his original post:

So what is a Chill or a Global Lock?:

From Notice #Z0025 sent out March 10, 2010

DTCC has experienced an increase in the number of customer queries regarding transaction restrictions, generally referred to as “chills” that DTC places on a relatively small number of eligible securities. Occasionally, DTC may need to “chill” certain transactions such as deposits, withdrawals-by-transfers (WTs), deliver orders (DOs) or restrict all these services (commonly referred to as a “global lock”) for operational, risk management or regulatory and compliance reasons. These restrictions may have an impact on Continuous Net Settlement (CNS) eligibility. DTCC recognizes that these actions may create additional operational processing among the member firms and between participants and their customers.

From Notice #B0846-11 sent out August 5, 2011

DTC may impose certain restrictions on a security in situations where DTC may become aware of certain potentially illegal or otherwise questionable features of a security, its issuer or other principal parties. In addition, DTC may place restrictions when it has been informed by the issuer or its agent, regulators or law enforcement, or has other compliance concerns that its Cede & Co certificate inventory has been compromised due to unauthorized, altered, fraudulent or counterfeit share issuance.

If DTC reasonably suspects that all or a portion of its street name holdings of a security, may not be fungible and freely transferable as required for DTC services, it may decide, with respect to that security, to chill one or more of its services or place a global lock on all services, as it deems appropriate.

Impact of a Global Lock and Trade Fails

A global lock on a security prevents the security from being transferred on the books of DTC and otherwise restricts any DTC activity with respect to the security. For so long as the global lock is in effect, Participants are unable to settle any further trades in that security, as their inventory is frozen and settlement of pending trades will fail. If counterparties nevertheless continue to trade in a security which is globally locked and those trades are submitted to DTC for settlement, those trades will also fail and be rejected in DTC’s system.

Global Sentry, What a bad Transfer Agent can do for a stock:

From Notice #B0177-11 sent out February 24, 2011

The SEC Roundtable on Microcaps, 3 hours of dry discussion about this very problem

and if you want to read it, here is the written transcript

And if you cannot stand the pain, here is some cliff notes from Renee:

What is the real effect on you the trader or shareholder?

From Notice A# 7281 sent out September 07, 2011

So you maybe asking again what does that have to do with me? In short, your favorite penny is going to have to dilute even more to pay the note holder who is going to charge them 10% more for the cost of doing business. A couple of really good posts explaining the game here in the OTC:

If that were not bad enough enter some more bad news that will impact traders, Illiquid Market Surcharge, excellent post and video from Mikey:

So who has had the “Chill” or “Global Lock” lifted or removed?

This is the only company I found that was released from the “Chill” and the Trade for Trade Indicator removed:

Now these are the “Global Lock” that have been removed

There were 5 of them in the Global Lock category that were resumed, but now the database just shows these two companies, likely purged old securities as these here are the two most recent cases. But the numbers are telling, currently over 305+ securities are chilled and well.. not a whole lot of cases to point to that were successful in getting them removed. To keep in context, the recent chills and global locks are for different purposes than what these two companies earned theirs for. This goes back to the Roundtable Discussion and the reasoning behind the recent spike in issuing these chills.

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